U.K. FSA report to offer explanation on missed Libor warnings

FSA says manipulation could be caught

The U.K. finance regulator, facing lawmaker criticism that it missed warning signs on the rigging of benchmark interest rates for years, may say there was no clear way for it to spot the manipulation.

The Financial Services Authority will issue a report today after an internal audit of the agency’s contact with Barclays Plc workers and other finance industry employees to determine whether warning signs were ignored. The agency may also state it wasn’t notified of any wrongdoing regarding rate setting, didn’t oversee the benchmarks themselves and that lenders also missed red flags that rates were manipulated.

“There are some issues for which you just cannot have a police force big enough ever to spot all these problems,” Adair Turner, chairman of the FSA, told U.K. lawmakers last week. “We could not have got at it by intensive supervision.”

After Barclays was fined 290 million pounds ($437 million) by the U.S. and U.K. in June last year, it said it had alerted regulators to problems with the London interbank offered rate before the investigation. The London-based lender said it spoke to the FSA, Bank of England, Federal Reserve Bank of New York and the British Bankers’ Association 33 times in 2007 and 2008.

The FSA opened its investigation into rate manipulation in early 2010, a year-and-a-half after the U.S. Commodity Futures Trading Commission’s probe began. Barclays, UBS AG and Royal Bank of Scotland Group Plc have been fined a total of more than $2.5 billion by U.S. and U.K. regulators for rate-rigging, and more than a dozen other firms are still being investigated.

Artificially Low

In its discussion with the FSA, Barclays “consistently” raised concerns its competitors were submitting artificially low quotes used in setting the rate, the bank told lawmakers in July. When it was fined, Barclays admitted to colluding with other banks to manipulate Libor and similar benchmarks to profit from derivatives and to make its finances appear healthier.

Turner said that, after reviewing information provided to the FSA or Bank of England by Barclays, and looking at other occasions when banks communicated about rate suspicions, no clear indication of trader manipulation was missed.

“Neither us nor the CFTC, or any other authority, had any way to spot the trader manipulation,” Turner told the Parliamentary Commission on Banking Standards.

Last year Turner told another group of lawmakers asking about Libor that the FSA “should have spotted it earlier.”

Andrew Bailey, the U.K.’s chief banking supervisor, is scheduled to testify tomorrow before the banking standards committee, which was set up last year in the wake of the Libor scandal. Bailey will lead the Prudential Regulation Authority, which oversees banking and insurance industry stability, on April 1 when the FSA is broken up.

Robert Diamond, who quit as chief executive officer of Barclays in the wake of the Libor fine, told lawmakers the bank also took too long to discover the actions of 14 traders who manipulated rates.

The British government last week formally started the search for a replacement body to oversee Libor after the British Bankers’ Association, the industry group that created the benchmark in 1986, agreed to relinquish oversight.